I sometimes explain stocks and bonds by comparing them to a Corvette and a pickup truck.
It's obviously not a perfect analogy, but it gets at something I think people sometimes miss when they're looking at their retirement portfolio.
A Corvette and a pickup truck aren't really competing with each other. They're designed to do different things.
The same is true of stocks and bonds.
In this week’s episode of Wisdom for Your Wisdom Years, I talk about why that distinction becomes particularly important once someone retires.
Stocks are generally the long-term growth engine. And retirement doesn't necessarily mean the need for growth goes away. If you retire in your 60s and live into your 90s, some of the money in your portfolio may have another 25 or 30 years to work.
But not all of it does.
Some of that money may need to pay your expenses next year.
That's where the job changes.
While you're working, a market decline is mostly something you see on a statement. You're still collecting a paycheck and probably still contributing to your retirement accounts.
In retirement, the cash flow reverses.
Now you're taking money out, and your expenses don't adjust themselves based on what the market is doing. If you need $80,000 or $100,000 from the portfolio this year, you still need it whether stocks are up 20% or down 20%.
That's one of the reasons bonds can play an important role. They're not there because we expect them to beat stocks over 30 years. They're there in part to provide relative stability, income, and liquidity so we aren't necessarily forced to sell stocks at a bad time to pay the bills.
And this is also why I don't think asset allocation can be determined by age alone.
Two couples can both be 67 years old with $2 million invested and need very different portfolios. If Social Security and pensions cover almost all of one couple's expenses, their portfolio has one job. If the other couple needs $100,000 a year from their investments to live, their portfolio has a very different job.
Same age. Same amount of money. Very different circumstances.
What we tend to see is that the portfolio makes more sense once we stop looking at it as one big pool of investments and start looking at what the different dollars actually need to accomplish.
The financial plan should determine what the portfolio needs to do.
